245 F.3d 133 (2nd Cir.

2001)

United States of America, Appellee,

v.
James J. McDermott, Jr., Defendant-Appellant,
Kathryn B. Gannon, also known as Kathryn B. GannonAkahoshi, also known as Marylin Star, and Anthony P.
Pomponio, Defendants.
Docket No. 00-1572

UNITED STATES COURT OF APPEALS FOR THE SECOND

CIRCUIT
Argued: Jan. 29, 2001
Decided: March 29, 2001

[Copyrighted Material Omitted]

Robert J. Anello, New York, NY (Morvillo, Abramowitz, Grand, Iason &
Silberberg, PC, of counsel), for Defendant-Appellant.
James J. Benjamin, Jr., Assistant United States Attorney, New York, NY
(Mary Jo White, United States Attorney, Jamie L. Kogan, Assistant
United States Attorney, of counsel), for Appellee.
Before OAKES, STRAUB and POOLER, Circuit Judges.
Defendant was convicted of insider trading and conspiracy following a
jury trial in the United States District Court for the Southern District of
New York, Kimba Wood, Judge, presiding.
Reversed in part; vacated and remanded in part.
OAKES, Senior Circuit Judge:

Defendant James J. McDermott appeals from a judgment entered against him in

the United States District Court for the Southern District of New York
following a jury trial before Kimba Wood, Judge, convicting him of conspiracy
to commit insider trading in violation of 18 U.S.C. 371 and of insider trading

in violation of 15 U.S.C. 78(j)(b) and 78ff and of 17 C.F.R. 240.10b-5. On

appeal, McDermott contends principally that (1) the evidence was insufficient
as a matter of law to support his convictions; (2) he was unfairly prejudiced as a
result of variance between the indictment and the proof at trial; and (3) the
district court abused its discretion under Federal Rule of Evidence 403. We
agree that there is insufficient evidence to support the conspiracy count,
although sufficient evidence exists to support McDermott's conviction on the
substantive offenses. Nevertheless, because of the variance between the single
conspiracy charged in the indictment and the proof adduced at trial, we find
that McDermott was prejudiced to the point of being denied a fair trial.
Accordingly, we reverse the conspiracy count and remand for a new trial on the
substantive counts.
BACKGROUND
2

The present prosecution arose out of a triangulated love affair involving the
president of a prominent investment bank, a pornographic film star and a New
Jersey businessman.

Until May 1999, McDermott was the president, CEO and Chairman of Keefe
Bruyette & Woods ("KBW"), an investment bank headquartered in New York
City that specializes in mergers and acquisitions in the banking industry.
Around 1996, McDermott began having an extramarital affair with Kathryn
Gannon. Gannon was an adult film star and an alleged prostitute who
performed using the stage name "Marylin Star." During the course of their
affair, McDermott made numerous stock recommendations to Gannon.
Unbeknownst to McDermott, Gannon was simultaneously having an affair with
Anthony Pomponio and passing these recommendations to him. Although
neither Gannon nor Pomponio had extensive training or expertise in securities
trading, together they earned around $170,000 in profits during the period
relevant to this case.

The government indicted McDermott, Gannon and Pomponio for conspiracy to

commit insider trading and for insider trading on the theory that McDermott's
recommendations to Gannon were based on non-public, material information.1
McDermott and Pomponio were tried together, but Gannon was not present.

The evidence at trial concerned primarily the relationship between McDermott

and Gannon and the trading activities of Gannon and Pomponio. The
Government built its case against McDermott almost entirely on circumstantial
evidence linking records of telephone conversations between McDermott and
Gannon with records of Gannon's and Pomponio's trading activities. Telephone

records revealed that McDermott and Gannon engaged in approximately 800

telephone calls during the charged period, including up to 29 calls in one day.
Trading records revealed correlations between the telephone calls and stock
trades. In addition to these records, the sensational highlight of the
government's evidence, which formed the basis of its perjury count against
Pomponio, consisted of audiotape recordings of Pomponio's SEC deposition.
These tapes undermined Pomponio's defense and credibility, as they recorded
him poorly telling lies, evading questions and affecting incredulous reactions.2
McDermott was sentenced to eight months' imprisonment, to be followed by a
two-year term of supervised release, a $25,000 fine and $600 in special
assessments.
DISCUSSION
A. Legal Sufficiency
6

McDermott challenges the sufficiency of the evidence to establish his

convictions both for a single conspiracy to commit insider trading and for the
related substantive offenses.

"A defendant challenging the sufficiency of the evidence bears a heavy

burden[.]" United States v. Pipola, 83 F.3d 556, 564 (2d Cir. 1996); see also
United States v. Gore, 154 F.3d 34, 39-40 (2d Cir. 1998). When reviewing
sufficiency challenges, "we 'view the evidence in the light most favorable to the
government, drawing all inferences in the government's favor'[.]" United States
v. Shareef, 190 F.3d 71, 76 (2d Cir. 1999) (quoting United States v. Allah, 130
F.3d 33, 45 (2d Cir. 1997)). An appellant must demonstrate that "no 'rational
trier of fact could have found the essential elements of the crime charged
beyond a reasonable doubt.'" United States v. Jones, 16 F.3d 487, 490 (2d Cir.
1994) (quoting Jackson v. Virginia, 443 U.S. 307, 319 (1979)). We apply these
principles equally to direct and to circumstantial evidence. See Gore, 154 F.3d
at 40. Finally, we note that the task of choosing among competing, permissible
inferences is for the fact-finder, not for the reviewing court. See United States
v. Friedman, 998 F.2d 53, 56 (2d Cir. 1993).

Measured against this high standard, we find that the evidence was insufficient
as a matter of law on the conspiracy count, but sufficient to establish
McDermott's conviction for the substantive offenses.

i). The Conspiracy Count

"[I]n order to prove a single conspiracy, the government must show that each

10

"[I]n order to prove a single conspiracy, the government must show that each
alleged member agreed to participate in what he knew to be a collective venture
directed toward a common goal. The coconspirators need not have agreed on
the details of the conspiracy, so long as they agreed on the essential nature of
the plan." United States v. Maldonado-Rivera, 922 F.2d 934, 963 (2d Cir. 1990)
(internal quotations and citations omitted). We have frequently noted that the
"essence of conspiracy is the agreement and not the commission of the
substantive offense." Gore, 154 F.3d at 40 (citing United States v. Abel, 258
F.2d 485, 489 (2d Cir. 1958), aff'd on other grounds, 362 U.S. 217 (1960)); see
also United States v. Walker, 142 F.3d 103, 112 (1998). Additionally, it is a
long-standing principle of this Court's law of conspiracy that "[n]obody is
liable in conspiracy except for the fair import of the concerted purpose or
agreement as he understands it; if later comers change that, he is not liable for
the change; his liability is limited to the common purposes while he remains in
it." United States v. Peoni, 100 F.2d 401, 403 (2d Cir. 1938).

11

Despite this well-settled law, the government here asks us to redefine a

conspiracy by its purpose, rather than by the agreement of its members to that
purpose. The government argues that from the perspective of Gannon and
Pomponio, albeit not from McDermott's perspective, there was a unitary
purpose to commit insider trading based on information furnished by
McDermott. According to the government, therefore, McDermott was part of
the conspiracy even though he did not agree to pass information to both Gannon
and Pomponio.

12

United States v. Carpenter, 791 F.2d 1024 (2d Cir. 1986), aff'd, 484 U.S. 19
(1987), forecloses the government's argument. In Carpenter, we reversed the
conspiracy conviction of defendant Winans, a Wall Street Journal reporter who
participated in a scheme with his friends Felis and Brant to misappropriate
insider information and to use it for personal gain. See id. at 1026-27, 1036.
Felis then passed the insider information to Spratt, who was not part of the
original agreement. See id. at 1036. We reversed Winans's conspiracy
conviction to the extent that it involved Spratt's trades. See id. at 1035-36.
Because Winans's original trading agreement with Felis and Brant was
narrowly limited to specific persons not including Spratt, about whom Winans
had no knowledge, we found that by passing the information to Spratt, Felis
had "'used the information obtained from Winans beyond the scope of the
original agreement.'" See id. at 1036 (quoting United States v. Winans, 612 F.
Supp. 827, 835 (S.D.N.Y. 1985)).

13

In Carpenter, we left open three hypothetical avenues of liability against

Winans. First, we emphasized that Winans "might have been liable for the

Spratt trades had the scope of the trading agreement been broader, to include
trading by or for persons other than the small group of conspirators herein." Id.
at 1036 (citing Pinkerton v. United States, 328 U.S. 640, 646-47 (1946)).
Second, we noted that Winans might have been liable for the Spratt trades had
the trades been "'part of the ramifications of the plan which could... be
reasonably forseen [sic] as a necessary or natural consequence of the unlawful
agreement.'" Id. (quoting Pinkerton, 328 U.S. at 648). Third, we suggested that
Winans might have been liable had he "at least known of the Felis-Spratt
relationship." Id. (citations omitted).
14

Because none of these avenues of liability is applicable to this case, we find

that McDermott is not liable for the trades made by Pomponio. There is no
record evidence suggesting that McDermott's agreement with Gannon
encompassed a broader scope than the two of them. McDermott and Gannon
were having an affair, and it is not obvious that it was or should have been
within McDermott's frame of reference that Gannon would share stock
information with others similarly situated, or even that there existed others
similarly situated. We decline to hold as a matter of law that a cheating heart
must foresee a cheating heart. Indeed, the only evidence that McDermott did
foresee or should have foreseen Gannon passing information to Pomponio
consisted of evidence suggesting that Gannon was a prostitute -- evidence that
the district court explicitly prohibited. Moreover, the proof at trial established
that McDermott had no knowledge of Pomponio's existence.

15

Accordingly, we hold that, as a matter of law, no rational jury could find

McDermott guilty beyond a reasonable doubt of a single conspiracy with
Pomponio to commit insider trading. The government has failed to show the
most basic element of a single conspiracy, namely, an agreement to pass insider
information to Gannon and possibly to another person, even if unknown. We
therefore reverse the judgment of conviction on that count.

16

ii). The Substantive Counts

17

In order to prove that McDermott committed insider trading, the government

was required to show that McDermott passed material, non-public information
to Gannon in violation of his fiduciary duties. See United States v. O'Hagan,
521 U.S. 642, 651-52 (1997); United States v. Cusimano, 123 F.3d 83, 87-88
(2d Cir. 1997). McDermott contends that the government failed to prove
beyond a reasonable doubt the non-public element of the offense. We disagree.

18

Viewed in the light most favorable to the government, the evidence showed,

inter alia: (1) that McDermott and Gannon were having an affair involving
incessant telephone conversations; (2) that Gannon, who was up until this point
an amateur trader, opened a trading account funded by monies given to her by
McDermott; (3) that during the alleged conspiracy period, Gannon traded
twenty-one times in twelve different stocks based upon McDermott's
recommendations; (4) that Gannon traded in non-blue chip stocks, many of
which were banks subject to non-public negotiations with KBW; (5) that
Gannon was quite successful in her trading and in the timing of her trades; (6)
that telephone conversations between Gannon and McDermott coincided with
Gannon's trading activity; and (7) that Gannon shared her recommendations
with Pomponio.
19

Although the government was unable to produce direct evidence of the content
of any conversation during which McDermott transferred material, non-public
information to Gannon, we find that rational minds could infer such a
conclusion from the above evidence. Circumstantial evidence is a legitimate
form of evidence in this Circuit, and in fact-intensive cases such as this,
requiring careful examination of trading records and a myriad of public
information, the jury is the appropriate body to determine a defendant's guilt or
innocence. See United States v. Morrison, 153 F.3d 34, 49 (2d Cir. 1998)
(holding, in context of sufficiency challenge, that jury's choice of competing
inference receives deference and that "[p]roof of the elements of the crimes
charged may be entirely by circumstantial evidence"). Therefore, we hold that
the evidence was sufficient to convict McDermott on the substantive offenses.
B. Variance

20

McDermott argues that he was prejudiced to the point of being denied a fair
trial as a result of the variance between the single conspiracy charged in the
indictment and the proof adduced at trial. We agree.

21

We begin by referring to our foregoing discussion of the sufficiency of the

evidence for the conspiracy count to note that there was a variance in this case
between the single conspiracy charged and the proof at trial. We review the
variance for its potential prejudicial effect on McDermott's trial for the
substantive counts of insider trading.

22

In order to reverse a conviction because of the existence of a variance, the

variance must have caused the defendant "substantial prejudice" at trial. See
United States v. Johansen, 56 F.3d 347, 351 (2d Cir. 1995). In evaluating
whether a defendant has been prejudiced by a variance, we consider several

factors, including: (1) whether the court gave a Pinkerton charge; (2) whether
statements of persons not in the conspiracy were used against the defendant; (3)
whether there was prejudicial spillover due to a large number of joined
defendants; and (4) whether any inflammatory or shocking evidence came in
against the defendant. See United States v. Berger, 224 F.3d 107, 115 (2d Cir.
2000); Johansen, 56 F.3d at 351-52 (finding substantial prejudice where only
one of four factors met).
23

We find here that there was prejudicial spillover due to joinder, even though
there was only one defendant joined with McDermott. The fact that McDermott
and Pomponio were tried together, in the absence of anyone else at the defense
table, increased the prejudicial effect of Pomponio's testimony on McDermott's
defense by channeling all references to a source of securities information
entirely onto McDermott. Given that Pomponio and McDermott were on trial
for conspiring to commit insider trading, that there was a large disparity
between the government's case against Pomponio for perjury and its case
against McDermott, that Ponponio could only be guilty on the substantive
insider trading counts if McDermott also were guilty, and that McDermott
conceded having given some public information to Gannon, the potential for
spillover was substantial.

24

We have noted that proper jury instructions can diminish the likelihood of
prejudice, see United States v. DiTommaso, 817 F.2d 201, 211 (2d Cir. 1987),
and that jurors are usually presumed to adhere to limiting instructions. See
United States v. Jones, 16 F.3d 487, 493 (2d Cir. 1994). However, we have also
repeatedly stated that this presumption fades when there is an overwhelming
probability that the jury will be called upon to perform humanly impossible
feats of mental dexterity. See id.; United States v. Figueroa, 618 F.2d 934, 946
(2d Cir. 1980). Although the district court here provided the jury with standard
limiting instructions, we find that under the circumstances of the case, where
the prejudicial spillover was so overwhelming, they cannot be presumed to be
effective.

25

In light of this prejudice, we reverse the judgment of conviction against

McDermott, and we remand for a new trial on the substantive counts.
C. Abuse of Discretion Under Rule 403

26

Recognizing the prejudicial effect that evidence of Gannon's occupation could

have on some members of the jury who might regard it as "sleazy," the district
court stated at a pretrial hearing that admission of testimony regarding

Gannon's occupation would be "not just distracting and inflammatory but

potentially essentially suggesting a predisposition on the part of men who were
intimate with her to do something unlawful."
27

Despite this statement, the district court allowed the government to introduce
evidence that Gannon worked as a dancer, model and actress under the stage
name "Marylin Star" and that Pomponio believed that Gannon "knew a
clientele of lawyers, stockbrokers, and such, high level people" and that she had
obtained her stock trading tips from a "client" or a "boyfriend client."

28

McDermott argues that the district court abused its discretion by admitting
evidence that Gannon worked using the screen name "Marylin Star" and that
she had a collection of "clientele," because this information created an inference
that Gannon worked as a porn star, a prostitute and/or a paid escort -information that the district court agreed had no probative value and should
have been omitted from trial. We agree that references to Gannon's clientele
should have been excluded, but we disagree that the district court abused its
discretion by admitting Gannon's stage name.

29

We review a trial court's evidentiary rulings for an abuse of discretion, see

United States v. Khalil, 214 F.3d 111, 122 (2d Cir.), cert. denied, __ U.S. __,
121 S. Ct. 326 (2000), and recognize that district courts enjoy broad discretion
over the admission of evidence. See United States v. SKW Metals & Alloys,
Inc., 195 F.3d 83, 87 (2d Cir. 1999) ("[e]videntiary rulings are reversed only if
they are 'manifestly erroneous,' such that the admission constitutes an abuse of
discretion"); United States v. Salameh, 152 F.3d 88, 110 (2d Cir. 1998) ("[w]e
will second-guess a district court 'only if there is a clear showing that the court
abused its discretion or acted arbitrarily or irrationally'") (quoting United States
v. Valdez, 16 F.3d 1324, 1332 (2d Cir. 1994)). Moreover, when reviewing a
Rule 403 ruling, we must review the evidence "'maximizing its probative value
and minimizing its prejudicial effect.'" United States v. Rubin, 37 F.3d 49, 53
(2d Cir. 1994) (quoting United States v. Arango-Correa, 851 F.2d 54, 58 (2d
Cir. 1988)).

30

The government offered a stipulation that Gannon was a model, dancer and
actress who appeared in films under the name "Marylin Star." At an in limine
hearing, McDermott accepted this stipulation in part and preserved an objection
to the admission of Gannon's screen name.3 Although the district court clearly
stated that Gannon's appearance in adult films added no probative value to the
case, it accepted the stipulation and found that the name "Marylin Star" did not
necessarily suggest that Gannon worked as an adult film star.

31

While we may disagree with a district court's evidentiary ruling, our

disagreement is not alone sufficient to reverse an otherwise rational, carefully
considered and non-arbitrary decision. Reviewing the district court's ruling in
the light that most minimizes its prejudicial effect, we find that the district court
did not abuse its discretion in finding that the stage name "Marylin Star" does
not, standing alone, necessarily imply that its user is an adult film actress.

32

The district court also rejected McDermott's pretrial motion to substitute the
word "clientele" with a word or phrase such as "friends," "acquaintances" or
"business acquaintances."4 Although the court warned that evidence of
Gannon's occupation could be distracting and inflammatory, it did not believe
that the word "clientele" necessarily suggested prostitution, because "[a]n
actress can have legitimate clients, such as litigators, who need to learn how to
act in court or who need voice lessons. So it's not beyond the realm of
possibility that there could be legitimate clients."

33

Even when considered in a light that most minimizes its prejudicial effect, we
fail to see how any rational juror presented with repeated testimony that
Gannon -- a model, dancer and actress with a sexy screen name -- had
numerous "clients" would not immediately speculate that she worked as a
prostitute or paid escort. Similarly, we fail to see how such a juror would not
immediately assume that McDermott's and Pomponio's respective relations
with Gannon were within the context of that occupation. Although it may not
be beyond the realm of possibility that Gannon had legitimate clients, a proper
Rule 403 analysis requires a realistic balancing, not an examination of farreaching possibilities.

34

Because we find that references to Gannon's "clientele" unfairly prejudiced

McDermott by casting an illicit light on his relationship with her by suggesting
that her occupation was of a "sleazy" nature, we find that such evidence should
not have been admitted and should not be admitted at trial on remand.
D. Other Arguments

35

In addition to his primary challenges, McDermott also argues that the district
court violated his Sixth Amendment right to confrontation and that he was
denied a fair trial because of the admission of evidence that Gannon had
invoked her Fifth Amendment rights. We have considered McDermott's
arguments on these points and find them to be without merit.

36

Finally, in light of our discussion of variance, we do not need to address

McDermott's arguments that the district court abused its discretion in denying
his motion for severance based on the "spillover effect" from the admission of
Pomponio's SEC testimony.
CONCLUSION
37

For the foregoing reasons, we vacate defendant's judgment of conviction on

count one and remand for a new trial on the substantive counts.

NOTES:
1

The government also charged Pomponio with one count of perjury in violation
of 18 U.S.C. 1621.

The following is an excerpt from Pomponio's SEC audiotape testimony at the

moment when the SEC lawyer confronted Pomponio with evidence that he and
Gannon had purchased the same stocks within a short period of one another:
Q: Our records reflect that Ms. Gannon purchased her stock at 8:59 a.m. on
August 26, 1997.
A: That's the same day you're saying?
Q: The same day, a half-hour before you did.
A: You're kidding? I'm serious. You really have that?
Q: Yes.
A: I can't believe that. I mean I believe you, I'm not saying I don't believe you
but that is sheer coincidence. That's the kind of stuff that I don't like. That is
sheer coincidence.

The government argues that McDermott failed to properly preserve his

objection to the admission of Gannon's screen name. We disagree.
Under Rule 103(a)(1) of the Federal Rules of Evidence, a party must make a
timely and specific objection to a ruling of evidence. We have held in this
Circuit that sometimes a party objecting to an evidentiary ruling involving
potentially prejudicial testimony cannot rely upon an in limine objection
because the trial court might be unable to balance the probative and the
prejudicial values outside of context, without reference to a witness's actual

testimony. See United States v. Yu-Leung, 51 F.3d 1116, 1120 (2d Cir. 1995);
see also Rosenfeld v. Basquiat, 78 F.3d 84, 90 (2d Cir. 1996). This Circuit does
not impose a blanket prohibition on preserving Rule 403 objections in limine.
Rather, an evidentiary issue that is not contextually bound may be preserved in
limine when it is (1) fairly presented to the court, (2) of the type that can be
finally decided in a pretrial hearing, and (3) is ruled upon by the court without
equivocation. See Yu-Leung, 51 F.3d at 1121. Moreover, we note that our
conclusion accords with the 2000 Amendments to the Federal Rules of
Evidence, which make clear that in limine objections are covered under Rule
103. See Fed. R. Evid. 103, notes.
We find that McDermott's in limine objection to Gannon's stage name satisfies
the above three factors. He argued the issue to the Court in a pretrial memo;
because the issue of introducing Gannon's stage name was self-contained, it
was of a nature to be finally decided; and, as both parties noted during the
hearing, the court considered the motion carefully and clearly before rendering
its final decision.
4

As with the evidence of Gannon's stage name, the Government contends that
McDermott waived this argument under Rule 103 because he failed to renew
his objection at trial. Applying the test in Yu-Leung, we find that McDermott
preserved his objection in limine because the issue was not contextually-bound,
and the court was able to balance its prejudicial and probative value in limine.
See Yu-Leung, 51 F.3d at 1120. Here, McDermott fairly presented the issue to
the court; because Pomponio's full SEC deposition testimony was before the
court, the issue could be finally decided; and, conducting a thorough Rule 403
balancing test, the court made a clear determination rejecting McDermott's
motion.